When you start working for yourself, one of the first decisions is whether to be a sole trader or set up a limited company. There's no single right answer. It depends on your profits, your plans and your personal circumstances. Here are the main differences.
Being a sole trader
As a sole trader, you and your business are legally the same. You register with HMRC for Self Assessment, keep records of your income and expenses, and pay income tax and National Insurance on your profits through your tax return.
- Simple to set up and run, with less paperwork and lower accountancy costs
- Your profits are your income, taxed in the year they're made
- In Scotland, your profits are taxed at Scottish income tax rates, which have six bands
- You're personally liable for the business's debts
Running a limited company
A limited company is a separate legal entity. It pays corporation tax on its profits, and you take money out as a director's salary, dividends or pension contributions.
- Limited liability: your personal assets are generally protected if the business gets into financial trouble
- Corporation tax of 19% to 25% on the company's profits, depending on how much it makes
- Dividends are taxed at UK rates, not Scottish rates, which can make a difference for Scottish taxpayers when deciding how to pay yourself
- More administration: annual accounts and a confirmation statement at Companies House, a company tax return, and often payroll
- Public information: your company's accounts and directors' details appear on the Companies House register
Which is right for you?
Being a sole trader is often the simplest way to start. A limited company can become more tax efficient as profits grow, and some clients prefer working with a company. But the extra costs and responsibilities need to be weighed against any savings, and the best choice for one person won't suit another.
You can also start as a sole trader and move to a limited company later, which is common as a business grows.
Talk it through with us
At your free initial consultation, we'll look at your plans and figures and help you decide. Then we can register your business, set up your bookkeeping software and look after your accounts and tax. Call 01355 708410 or get in touch.